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S&P: $4 Trillion is Only a Start

Is $4 trillion in debt reduction cuts over the next decade or so enough to satisfy Standard & Poors, the credit ratings agency now threatening a 50-50 chance of a swift credit rating downgrade to the U.S.s Triple-A without that sum?

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That $4 trillion may not be enough, says S&P, it may want more. Moreover, S&P today blamed "acrimonious" D.C. debt fights that are worse than it expected as for why it fast-tracked the time for when it would downgrade the U.S.'s top-notch credit rating, says S&P's top executive overseeing sovereign ratings.

And although downgrades usually come from external shocks to an economy, the U.S.'s wound is "a self-inflicted" problem, says S&P sovereign-rating chief John Chambers.

The webinar was held for investors on state and local governments and pension issues, says an S&P spokesman.

Here was the question to S&P exec John Chambers, and his reply:

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Q: There's been a figure of $4 trillion dollars circulating as an example of the scope of fiscal consolidation measures that could work to stabilize the U.S. debt-gdp ratios. Could you explain how that figure was arrived at since it was mentioned in S&P's reports and where it figures in S&P analysis?"

A: First of all, that figure comes initially from the Bowles-Simpson fiscal commission, and it was embraced by President Obama in his April 13 speech and Paul Ryan in his counter-budget proposal. And so you had policy makers converging around the amount. Now actually the $4 trillion, depending on whether it is front-loaded or back-loaded, is not going to do the trick in terms of stabilizing U.S. government debt-to GDP ratios. But it takes you pretty far along. And I think a grand bargain of that nature would signal, you know, the seriousness of policy makers to address the fiscal issues of the United States, to actually stabilize the debt-to-GDP. The IMF says it takes 7.5% of GDP consolidation. I think we have more than that."

The U.S. annual budget deficit is now around 9% of GDP.

Chambers adds: But $4 trillion would be a good down payment. We thought that..if policy makers could deliver the goods on that, then that would be a strong sign on our political scores and eventually on our projections on the fiscal side.

S&P has already said it may slash the Triple-A rating if a debt ceiling deal is not accompanied by what it deems is a credible plan to cut the $14.3 trillion federal deficit by $4 trillion. The plan has "to have bipartisan support," Chambers said. "If you have a plan that is only backed by one side or the other, even if you got it through, you would be faced with the prospect of it being unwound."

So, S&P's Chambers is saying the ratings agency wants to see at least a $4 trillion deal, one that would come with bipartisan support, too, because the ratings agency fears without that support, Congress will upend any debt-cutting plan.

To date, Republicans and Democrats have plans in the works that fall short of $3 trillion in cuts over the next decade.

Without a deal, the U.S. Treasury says the government will run out of money to pay its debtors by Aug. 2.

Chambers also said any government or company put on credit watch negative "means there's a one-in-two chance that your rating might be lowered."

For the U.S., he said, S&P shortened that time horizon in July. "Why did we shorten that time horizon? We always thought the debate around the debt ceiling fight would always be acrimonious. It turned out to be even more acrimonious than we had thought and more detrimental" to the credit standing of the U.S.

"The United States benefits from strong checks and balances..but the debate around the debt ceiling I think has been detrimental," Chambers said. "This has been a self-inflicted" problem, "it hasn't been an external shock."